October 21, 2020

Technicals suggest the S&P 500 could jump 30% in a current bull market cycle that will extend to 2022, Fundstrat says

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NYSE trader
  • The S&P 500 could surge 30% from Monday’s close to 4,600 in a bull market cycle that extends into 2022, according to a technical analysis note from Fundstrat.
  • The cycle backdrop for stocks remains bullish and is still improving, market breadth is expanding, and the laggards are bottoming, the note highlighted.
  • “We would encourage investors to keep in mind the improving longer-term cycle backdrop underway that should support equities well into 2021,” Fundstrat said.
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The stock market should continue its run for at least another two years, according to a technical analysis note from Fundstrat sent to clients on Tuesday.

Specifically, monthly cycle indicators point to a continued uptrend that is supportive of the S&P 500 rising to 4,400 to 4,600, representing potential upside of 25% to 30% from Monday’s close, respectively. 

“Our long-term monthly quadrant balance oscillator, tracking 2-4 year market cycles, continues to build positively from oversold levels signaling the current cycle likely has room to run into 2022,” Fundstrat analyst Rob Sluymer said.

The percentage of stocks in the S&P 500 with rising monthly momentum continues to rise from its COVID-19 low in March, and has plenty of upside left. This supports Fundstrat’s view that a new four-year cycle bull market “is still in the early stages of developing,” the note said.

On top of that, other bullish technical indicators are building a more supportive picture for stocks longer term.

Read more: Good deals in pandemic-hit companies are proving hard to find. Here’s how big investors that raised billions to pounce on corporate distress are changing up their playbooks.

New cycle highs in the outperformance of the S&P 500 relative to the US Barclay’s Aggregate Bond Index lead Fundstrat to continue recommending clients overweight equities relative to bonds. 

 And new highs in the Advance/Decline indicator shows that the rally in stocks is broadening out into other sectors with stronger market breadth. This increased participation only strengthens the current bull market.

Separate from the Fundstrat note, new highs in the Dow Jones Transportation Average last week suggest that the market will continue to surge higher, based on the more than 100-year-old Dow Theory, often followed by technical analysts. 

While some short-term indicators are showing signs of becoming overbought, suggesting a pause or pullback in stocks in the coming week, Fundstrat concluded that these technical events should be seen as near-term noise, and pullbacks “as an opportunity to increase equity exposure,” according to the note.